Subscribe

Curious Cat Kivans

Investing and Economics Blog

In a survey of more than 36,000 cardholders conducted by Consumer Reports, five of the largest MasterCard and Visa issuers, JPMorgan Chase (Charts, Fortune 500), Bank of America (Charts, Fortune 500), Citibank, Capital One (Charts, Fortune 500), and HSBC (Charts) — which together control about 80 percent of the market — earned mediocre rating scores.

Consumer Report’s survey on the best and worst credit cards found that five of the largest MasterCard and Visa issuers earned so-so ratings. The card issuer USAA Federal Savings, which scored 95 points out of a possible 100, earned the highest rating. The Navy Federal Credit Union and other credit unions followed suit with high scores. The top three rated issuers charged interest rates between 9 percent and 11 percent.

That’s much lower than the two lowest-rated issuers, Direct Merchants (scoring 67 points) and Washington Mutual’s Providian (earning 61 points), which both charge 17 percent. And there is good news for anyone shopping for a card. Until recently the USAA Federal Savings card has been limited to members of the military, retired military personnel and their families. It’s now opened up its membership policy so that almost anyone can join.

Every day, about 27,000 Americans are the victims of identity theft, according to the Federal Trade Commission. In about a third of those crimes, crooks use the information to open new accounts in their victims’ names.
…
But the landscape is improving with security freezes, a safeguard promoted by Consumers Union (the nonprofit publisher of Consumer Reports) and other consumer groups that has been adopted in 37 states, including California, and the District of Columbia.

A freeze essentially locks up the information needed to conduct a credit check, and creditors won’t open new accounts without that check. An imposter will be foiled, but you can lift the freeze using a PIN if you want to open new accounts. A security freeze provides much stronger protection than the fraud alert currently available under federal law.
…
Credit bureaus also make big bucks from selling to consumers more expensive credit-monitoring services, which are unnecessary, especially when a security freeze is in place. Consumers Union has asked the Federal Trade Commission to help inform consumers about security freezes.

There are at least 2 problems with too much income inequality: first it is bad for the economy and second it is unfair. If all the rich were like Larry Page or Warren Buffett (or even say many of them were) instead of spoiled rich kids that would eliminate one problem. Too many people live with too few economic resources in the present day – that is not right. And too much income inequality destroys the economy. Surprise: The rich get richer and the poor get more numerous

From 1979 to 2006, the hourly pay of California’s low-wage workers fell by 7.2 percent after adjusting for inflation. High-wage workers saw gains of 18.4 percent, while those exactly in the middle edged up 1.3 percent.

The richest Californians are capturing a growing share of wealth. Income reported for tax purposes of the top 1 percent of the state’s taxpayers jumped 107.7 percent from 1995 to 2005, after adjusting for inflation. During the same period, income of the middle fifth of taxpayers rose 9.3 percent.

By the way there are many things that would be hard to live with but how do people even think of spending $500,000 on some kids birthday party (search for super sweet 16th if you have not heard of the crazy idea)? I really can’t fathom people being so ludicrously superficial and cruel. If you have such money to throw away how can you possibly choose to spend it on a spoiled brat’s party instead of helping out hundreds less fortunate 16 year olds literally starving to death around the globe? I really don’t understand. I am embarrassed to be of the same species as such people.

Example 30 year mortgage rates (from myfico.com – see site for current rate estimates):

FICO score

APR May

APR Aug

payment/mo May

payment/mo Aug

760-850

5.86%

6.27%

$2,362

$2,467

700-759

6.08%

6.49%

$2,419

$2,525

660-699

6.37%

6.77%

$2,493

$2,600

620-659

7.18%

7.58%

$2,709

$2,819

580-619

8.82%

9.32%

$3,167

$3,311

500-579

9.68%

10.31%

$3,416

$3,603

Amounts shown for borrowing $400,000 and rates as of May 7th. For scores above 620, the APRs above assume a mortgage with 1.0 points and 80% Loan-to-Value Ratio. For scores below 620, these APRs assume a mortgage with 0 points and 60 to 80% Loan-to-Value Ratio.

Frankly I was expecting the rates to show the widely reported expanding of the risk premium (charging increasingly higher rates for riskier borrowers). For example, in May the difference was 382 basis points (9.68% for the lowest FICO range and 5.86% for the highest. However the current difference is just 404 basis points – hardly a big increase. The reason must be that the MyFICO page shows rates for homes with 20% down at the high end of scores and 20-40% down below there.

The quantitative schools of investing rely on very high powered mathematics (often drawing on physics and engineering graduate students). They tread on very dangerous ground (often engaging in complex and highly leveraged speculation) and make errors in assumptions about the market conditions upon which the mathematical models they use to invest are based. Fat Tails and Limitations of Normal Distributions describes one common mistake:

The central reasons why fat tails exist is a result of interdependence during market extremes. People’s decisions are not always fully independent or logical. At extreme market highs, investors become irrationally exuberant. At extreme lows, investors become fearfull and less risk tolerant.

Stock market data clearly shows that a normal distribution does not provide a good model of the market. Not every system is defined by a normal distribution – it is common for distributions to be close to normal but there is no reason any system need be. Many statistical tools have as an underlying assumption that the system in question is a normal distribution (therefore to use the tools you need to determine if the system can be classified that way – if not some tools can’t be used).

Crazy as it seems, very smart people continually forget that the markets often experience panics, euphoria, behave in ways that models do not predict, seize up and fail to function… Against the Gods by Peter Bernstein provides a good picture of the chaotic nature of financial market risks. A good book on an example of a mathematical model failure, Long Term Capital Management: When Genius Failed. Another excellent book on financial market chaos is: Manias, Panics, and Crashes: A History of Financial Crises.

I keep thinking people will learn but so far the faith in numbers seems to outweigh the past examples of overconfident failures.

During the second quarter, the median single-family home price was $223,800, 1.5 percent less than a year ago, according to the National Association of Realtors (NAR). It was the fourth consecutive quarter of price declines. Condo prices rose 1 percent to a median of $226,800.

Wow, that doesn’t sound bad. For comparison the NASDAQ index was down 1.6% today. In addition, always remember median prices are not as straight forward as it might seem. The mix of housing that sells changes between the periods being compared. Often (though maybe not this time) as the housing speculation subsides the mix of houses shifts as fewer expensive houses are bought which would tend to mean even if prices for identical houses stayed the same the median price (of houses actually sold) would decline.

Home sales have fallen in many markets, inventories have stretched to a nearly eight-month supply, and new-home builders have been reporting big losses.

There are real changes taking place in the real estate market but the big changes are increased inventories, increased mortgage defaults and a credit crunch – not declining prices. My prediction of price drops was as small as any almost any I saw over the last few years. And so far, the declines are even less than I thought we would see. The biggest factor for the depth of the pricing declines is going to be how many houses are forced into foreclosure (which is unfortunately possibly going to be high due to adjustable rate mortgages being adjusted up and requiring higher mortgage payments).

In the short term, the credit crunch is having an impact and that may increase if the jumbo loans (for those with significant down payment and good credit) continue to be hard to finance. But I don’t expect that to be the situation even 3 months from now – of course I could be wrong. The real estate situation (pricing, inventory…), as often is the case, is hugely impacted by the location. Some areas, like Arizona and Florida, are being hardest hit now.

Zip monitors 18 metro-area markets from all four regions of the country. For the 12 months ended July 31, only Boston and San Diego showed drops. Boston’s inventory fell 5.8 percent and San Diego’s dropped 2.1 percent. The average for the 18 cities was a 19 percent increase in homes on the market
…
The wait for tenants may be a long one. It’s much harder to get a loan these days for all but the best borrowers. Borrowers, for the most part, now must put more money down, document their income and assets, have few dings against their credit worthiness and show that they can afford the payments. Those tightened lending restrictions eliminate potential buyers from the market, reducing demand even as more supply hits the listings due to big jumps in foreclosures and builders finishing up projects initiated before the slump took hold.

What does the current data show about the real estate market overall? Across the country in the last year the median price has actually increased slightly. It looks like the data for the calendar year 2007 will show a decline for about 2%. Some areas have been much harder hit with median prices dropping over 10% (Las Vegas, Florida, Phoenix…). Mortgages any of 1) questionable credit score 2) jumbo loan or to a lessor extent with little money down are becoming hard to come by. Foreclosures are increasing dramatically. Builders are having a great deal of difficulty selling new housing they have built.

Still the decline in median prices is far from as dramatic as many feel (there have been large changes in the market but it still has not lead to a crash in home values or even a noticeable decline in most places). The increasing supply of houses for sale will put pressure on housing prices to decline. But without a significant continued increase in foreclosures (which is possible but it is still difficult to predict how large an increase we will see) I still do not believe we will see dramatic price declines in most of the country. The possibility (of say declines of over 15% in a year or two) is much higher now than it was in the last couple of years.

Post from 2004 on the real estate bubble worries then – again prices would have to fall a great deal to fall below the prices in 2004 (possible but not very likely to happen in the coming years). The real estate problems are significant and pose a danger to the economy (they certainly are already decreasing economic growth) however that is much different than a crash in housing prices. And as bad as the credit markets have been and rising foreclosures, increased housing inventory the anticipated crash in prices has still not been seen nationwide – and I stand by my belief we won’t see it. Though I will admit less confidently than at any time so far – I would hedge my bet on this prediction at this point (if I actually had bet any money on that prediction – I have no desire to sell any of my 401k money invested in real estate, my rental property or my house).

Well the credit crisis triggered by the fallout from lax mortgage lending is really making waves. It seems we are likely to have some real issues to deal with. The reduction of easy money can have serious consequences to an economy especially one so based on spending beyond what it is producing. I’m still not sure what the overall impact will be but the risks certainly seem to be worth watching.

the formula for the widely used FICO credit score is about to change. Fair Isaac Corp., creator of the FICO score used by lenders, says it will no longer consider authorized user accounts when factoring a consumer’s score. An authorized user of a credit card is free to use the plastic, but doesn’t have to pay the bill. Parents often make a child an authorized user of their card to give a youngster access to credit. But this has other perks. The child inherits the parents’ credit history. And if it’s a good one, the child receives a high credit score.

But some Internet-based credit-repair firms have been using this to boost the credit scores of strangers with poor credit. The firms pay a person with an excellent credit score to add someone with a rocky record as an authorized user on a card for a few months. The authorized user doesn’t ever use the plastic. Instead, he or she gets the benefit of the account owner’s credit history, which can raise a weak score by a couple of hundred points.
…
Worse for some, the change will mean no FICO score at all. Fair Isaac estimates 1.5 million to 3 million consumers will no longer have enough information in their credit report to be able to produce a FICO score. Among those most likely affected are young adults who have been added to their parents’ accounts.

Companies that sell stuff have spent huge sums training us to think stuff is still valuable. But it would be closer to the truth to treat stuff as worthless. In fact, worse than worthless, because once you’ve accumulated a certain amount of stuff, it starts to own you rather than the other way around.
…
In industrialized countries the same thing happened with food in the middle of the twentieth century. As food got cheaper (or we got richer; they’re indistinguishable), eating too much started to be a bigger danger than eating too little. We’ve now reached that point with stuff. For most people, rich or poor, stuff has become a burden.